Why a cheaper fund is not automatically a better one
The expense ratio is the easiest number to compare, so it gets compared most. Here is why I do not use it to screen funds, and what I look at instead.
The expense ratio is the easiest thing to compare between two funds. One number, two decimal places, lower looks better. So it gets compared more than anything else.
I do not use it to screen funds. That surprises people, so this page explains the reasoning. It names no scheme and tells you nothing to buy.
What the expense ratio actually is
It is the yearly cost of running the scheme, taken out of the scheme’s assets a little every day. Fund management fees, the registrar, custody, audit, the distributor’s commission in a regular plan, and the rest of it.
You never see a bill. By the time you look at the NAV, the cost has already come out of it. That invisibility is exactly why people fixate on the number: it is the one charge you can look up before you invest.
Why I do not screen on it
Because the number moves with the size of the fund, and size is not a quality.
A small fund spreads its fixed costs over a small pool, so each investor’s share of those costs is larger. SEBI caps what a scheme may charge and the cap steps down as the scheme grows, so a bigger fund almost mechanically shows a lower ratio.
That means a low expense ratio often tells you the fund is large. It does not tell you the manager is any good.
What a large fund has to live with
A fund that has grown very big cannot move the way a small one can. If the manager wants out of a holding, selling a large position takes time, and the selling itself moves the price against them. Buying has the same problem in reverse.
Some funds handle this by restricting how much new money they will take, or by closing lump-sum purchases and allowing only instalments. That is not a mark against them. It is a manager being honest that more money would get in the way of how they invest.
But it does mean the cheap ratio came with a constraint attached.
What a small fund has to live with
Higher cost, usually. Less of a track record. More risk that it never gathers enough assets to be viable, and gets merged into something else.
In exchange, it can hold a position small enough to matter to it and still get out of it in a day.
What I look at instead
The person managing the money, and whether the fund still fits the way they manage it.
Who is running it, and how they think
Every manager has a philosophy, whether or not they use the word. Some buy growing companies and accept paying up for them. Some will not pay up for anything. Some want quality balance sheets above all. Some buy what everyone else has given up on.
None of those is correct. What matters is that there is one, that it is stated, and that the portfolio actually looks like it.
How they enter and leave a position
A philosophy is a claim. Entries and exits are evidence. A manager who says they are patient and turns the portfolio over twice a year is telling you two different things, and the trades are the true one.
Whether the fund has outgrown its own approach
This is the question I keep coming back to. An approach that needs to buy small, out-of-favour companies stops working when the fund is too big to take a meaningful position in one. The philosophy does not change on paper. It just quietly stops being possible.
The manager’s own history, not the fund’s
A fund’s record is a record of whoever was running it at the time. If that person left two years ago, the ten-year line on the chart is partly somebody else’s work.
So I look at what the manager has done, across wherever they have done it, rather than at the name on the fund.
A fund’s past is a fact about the past. The manager is the part of it that is still there tomorrow.
On ratings
Ratings are useful for narrowing a list. They are not verdicts.
A rating is someone’s opinion, arrived at by their method, mostly from what has already happened. SEBI does not rate schemes, and nobody is permitted to tell you a rating predicts anything. Two rating houses often disagree about the same fund, which should tell you what kind of thing a rating is.
Use them to find things to look at. Do not use them as the reason you bought.
Where cost really does decide it
Two places, and I want to be straight about both.
Regular and direct plans
Same portfolio, same manager, same decisions. The regular plan’s ratio includes a distributor’s commission; the direct plan’s does not, so it is lower.
What you are paying for is the help and the service, or going without them. That is a real choice and the cost difference is real.
Two funds tracking one index
Here cost is close to the whole story. If two funds hold the same index in the same proportions, neither manager is making decisions, and the cheaper one keeps more of the index’s outcome for you.
Tracking error is worth a look too, but cost is the main lever.
Outside those two situations, cost is one input among several, and not the first one I reach for.
The short version: a low expense ratio is a fact about the fund’s size. A high one is a fact about its size too. Neither is a fact about how well your money is being looked after.
What this does not mean
It does not mean ignore cost. Cost compounds against you, quietly, every year you hold. Over a long holding it matters a great deal.
It means do not let the one number you can easily compare become the only number you compare. The easy comparison is not always the useful one.
And none of this is a view on any particular scheme. I have deliberately named none, because the right answer depends on your goals, how long you have, and how much movement you can live with — and I know none of that about you from here.
Where to check things for yourself
A reasonable next step is to pull up something you already hold and find its expense ratio, then find out who has been managing it and for how long. If the second answer is harder to get than the first, that is the point of this page.